Banca Intesa: Bring 'Em On

It's ready to fight off new competition if Italy lifts limits on foreign takeovers

When Corrado Passera took over Banca Intesa, Italy's largest bank, in 2002, it was a textbook example of what goes wrong in poorly managed mergers. Bad loans were ballooning, costs were skyrocketing, and warring fiefdoms from its three merged banks were resisting change. But 30 months since he launched his turnaround plan, the soft-spoken former McKinsey manager has pulled off a swift turnaround ahead of target. On Mar. 7, Intesa reported net income rose 55% in 2004, to $2.5 billion, and return on equity hit 12.9%, up from 1.4% in 2002. "Management did a great job in restructuring the bank," says Goldman Sachs & Co. (GS ) analyst Alessandro Santoni.

Now for the hard part. Passera and other Italian bank heads could be in for vastly increased competition on their home turf. Bank of Italy Governor Antonio Fazio is facing unprecedented pressure to lift longstanding barriers to foreign takeovers of Italian banks. Passero vows to be ready when Italy as well as other countries open up their borders. He aims to outsell the competition in Italy's retail market and initiate a few acquisitions of his own in Eastern Europe. The goal: to catapult Intesa, now No. 11 in the euro zone with assets of $363 billion and a market capitalization of $31 billion, way up the ranks.

Passera, a lanky manager with an MBA from Wharton, is now on the prowl for banks in Russia, Turkey, and Bosnia. On Feb. 12, Intesa bought 75% of Serbia's second-largest bank, Delta Banka, for $357 million. Intesa's Central and Eastern European division, including banks in Croatia, Hungary, and Slovakia, already generated 12% of net profit in 2004.

To lure new customers in Italy, Passera and his head of retail banking, Massimo Arrighetti, replaced a confusing array of 1,500 bank products with 250, introducing incentives and easier access to loans. For example, individuals can obtain consumer loans of up to $40,000 within 48 hours -- lightning speed in Italy -- if they meet a simplified qualification formula. The bank also invested heavily in information technology systems and employee training. Last year income from retail operations rose 7.2%, topping $10 billion.

Passera and Arrighetti have jolted the Italian banking market once before. In 2000 they created a vibrant retail banking business called BancaPosta, a unit of the state-owned postal service which Passera turned around before joining Intesa. Now the duo is replicating the same consumer-friendly approach at Intesa. On Jan. 1, the bank launched a discount program for customers who shop at retailers that also bank with Intesa. Clients who buy clothes with their Intesa debit or credit card at a chain called Boggi Group receive a rebate of 15%. Buy gas at ERG, a service station chain, and the rebate is 4%. Operating profit in the retail division jumped 24.6% last year, to $4 billion.

RIVALS READY

While overhauling the consumer division, Passera has cut back lending to big companies, especially outside Italy. He has refocused instead on Italy's small and midsize businesses. "Sometimes we find partners, sometimes we take an equity stake. In a large number of cases we help relaunch [troubled] companies," he says.

But it hasn't been totally smooth going. Intesa shelled out $211 million to settle claims from the administrator of bankrupt milk giant Parmalat against Intesa's capital markets unit, Nextra. It also continues to lose money on two Latin American banks and could be buffeted this year if struggling auto maker Fiat (FIA ) can't repay a $4 billion convertible loan to banks, of which Intesa has an estimated $792 million share.

The competition is not standing still. UniCredito Italiano, still more profitable than Intesa, is also building a strong Eastern Europe network and is keen on doing a big merger whenever Italian authorities allow. But with Intesa back in fighting shape, the battle has only just begun.

By Gail Edmondson in Frankfurt

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